Carmanah Continues to Light It Up

Carmanah reported F03 financial results that met our expectations...

Excerpt from a recent research update by analyst Sara Elford of
href="http://www.canaccord.com" target=_blank>Canaccord Capital Corporation.

Third Quarter Results In-line with Expectations

Carmanah reported F03 financial results that met our expectations.
Revenue increased 42% year-over-year to $9.2 million. The company achieved breakeven EPS, as expected. We continue to expect Carmanah to move into positive EPS territory in F04, as it benefits from much improved economies of scale on a doubling of its revenue base.

A few points are worth noting:

The increase in revenue for the year reflects three things: (1) continued growth in its core marine market, (2) the early success of Carmanah's solar-powered LED lights in a variety of new end markets - namely the aviation (more than $2 million of the year's total revenue) and transit segments, and (3) the acquisition of AVVA in Q4/F03 (contributing $0.8 million in revenue). AVVA is expected to expedite Carmanah's entry into the North American roadway market. We expect the company's diversification strategy to continue to bear fruit in the quarters and years ahead.

The decline in the US dollar on a year-over-year basis reduced Carmanah's full year revenue by $0.8 million. The company's gross margin was 51.7%, down from 56.6% a year ago. Carmanah's sales are US-dollar denominated, while most of its costs are sourced in Canadian dollars.

At the end of the year, Carmanah had a backlog of $1.1 million. This is notable if for no other reason than this really isn't a backlog-based business at this point. Most of Carmanah's orders are still relatively small and turn over quickly. That said, orders in the transit segment have the potential to be very large. For example, a multi-year contract with London Bus Services (for solar powered bus stops) has the potential to exceed $20 million for the winning supplier.

Outlook and Recommendation

Carmanah is still in the very early stages of its long-term growth curve. The potential for its solar-powered LED lights is becoming increasingly clear, as the company has identified and entered new end markets with almost immediate momentum. The aviation market is a principle example of this, where, in the first 49 days of F04, Carmanah secured orders valued at $1.1 million. The company first entered the aviation market in F03.

For F04, we expect Carmanah's revenue to double to $18.5 million - driven by the inclusion of AVVA for the full year and continued growth in all of the company's end markets. According to management, the current momentum in each of Carmanah's target markets is strong. Our EPS estimates for F04 and F05 are unchanged at $0.06 and $0.10, respectively.

Valuation wise, we expect Carmanah's broadenIng audience to continue to result in a premium multiple being awarded to CMH shares. Using a PEG ratio approach, we think the company can sustain 30% EPS growth beyond F05 for at least a few years. A 30 times P/E multiple applied to our F05 earnings estimate yields a target price of $3.00.

We are reiterating our BUY rating and raising our target price from $2.00 to $3.00. In a nutshell, we expect Carmanah's hypergrowth phase over the next two to three years to attract continued attention and momemtum in the year ahead.